Category Archives: Investing Money

U.S. Stock Valuations haven’t been this Extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”

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U.S. stock valuations haven’t been this extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”

This is how much fees are hurting your retirement

Thursday = Retirement Issues

My Comments: Value is in the eye of the beholder. When we need something, and for whatever reason, choose not to do it by ourselves, we spend money. If you are selling advice, or pork chops, or cars, people are going to spend money when they have to.

As a self-styled expert on retirement planning, what you pay for financial advice can run into several percentage points every year. What is your frame of reference that determines if you are getting value in exchange for what you are paying?

Aug 17, 2017 Craig L. Israelsen

This article is reprinted by permission (?) from NextAvenue.org.

The importance of keeping your investment portfolio costs low should be self-evident. They come directly out of your pocket. But you may be surprised to see how much it matters to stick with low-fee mutual funds and Exchange-Traded Funds (ETFs). I’ve run the numbers.

The two primary portfolio costs consist of what’s known as the “expense ratio” of the funds or ETFs (the annual fee charged as a percentage of assets) and the “advisory fee “(if there is a financial adviser involved).

The average expense ratio among all mutual funds is roughly 100 basis points or 1.0% (one basis point is one hundredth of 1%). Assuming an annual advisory fee of 100 basis points, or 1%, the total portfolio cost is 2% (or 200 basis points). At that level, for a diversified fund portfolio with a starting balance of $1 million, the average annual withdrawal for a retiree between age 70 and 95 is about $126,426 (assuming the retiree makes the government’s Required Minimum Distribution or RMD). Remember: this is an average withdrawal figure over a 25-year period; the actual RMD will vary each year based on your portfolio’s performance during the prior year and each year’s RMD percentage.

If the cost of funds in the portfolio is cut in half by using mutual funds or ETFs with lower expense ratios, the overall portfolio cost can be reduced from 2% to 1.5%. By doing so, the average annual withdrawal then increases to $136,218, meaning the retiree will have roughly $10,000 more income each year. That works out to a “raise” of about $830 a month during retirement.

$32,000 more a year in retirement

But you can do even better. It is now possible, by using low-cost ETFs, to build a diversified retirement portfolio for as low as .10% (or 10 basis points). If the advisory fee were reduced by a mere 10% down to .90% (or 90 basis points), the overall portfolio cost could be lowered to 1.0%. At that level, the retiree can withdraw an average of $146,853 each year — or an additional $10,000 annually.

Finally, if the adviser lowered his or her fee to .40% and the fund expenses amounted to .10%, the total portfolio cost would be just .50%. At that level, $158,407 would be the average amount withdrawn each year.

All together, by slashing fund expense ratios from 1.0% to .10% and the advisory fee from 1% to .40%, the retiree could receive $32,000 additional annual retirement income — or roughly $2,600 more each month between the ages of 70 and 95. Clearly, the impact of portfolio costs is huge.

A modern diversified portfolio

Here’s how to put together a low-cost, diversified portfolio that I call the 7Twelve® portfolio. If you use low-cost, actively managed funds from various fund families, the overall fund expense can be as low as .54%. If you use ETFs from various fund families, the cost can drop to .16%. And if you use just Vanguard ETFs, the overall fund expense ratio can be as low as .10% (I have no affiliation with Vanguard; they’re just an investment company specializing in keeping costs low).

The idea of building a diversified portfolio for as little as .10% is not theoretical. It is a reality and can and should be considered.



Craig L. Israelsen, Ph.D., teaches in the personal financial planning program at Utah Valley University in Orem, Utah. He is the author of “7Twelve: A Diversified Investment Portfolio With a Plan” and his website is 7TwelvePortfolio.com.

Disruption Of Confidence

Monday = Investing Money:

I’d like to think that my posts help someone, anyone? Professionally I’ve lived in the financial world for over 40 years and it pains me to say I haven’t a clue what’s going to happen next. What’s telling is that others, far more competent than I, don’t have a clue either.

Lance Roberts, whose comments I share this week, is a technician, attempting to glean clues from a rigorous adherence to mathematics and the signals that supposedly exist and reveal the future when correctly interpreted. Tread carefully.

Aug. 20, 2017 Lance Roberts Seeking Alpha

As noted last week:
“The weakness in the market previously, combined with the threats between the U.S. and North Korea, led to a fairly sharp unwinding in equities on Thursday which in turn triggered a short-term sell signal.

That sell-off has remained confined to the current bullish trend line but has threatened to violate the 50-dma (day/daily moving average). If the market is unable to regain the 50-dma on Monday, and remain above it for the balance of the coming week, the most likely move in the markets will be lower.”

I have updated the chart above (see HERE) through Friday afternoon. I followed that analysis up on Tuesday, stating:
“On Monday, the market surged out of the gate as headlines suggested ‘geopolitical risk’ had subsided. I find this particular explanation hard to digest, given the rising rhetoric of a potential trade war with China, violence in Charlottesville over the weekend, no resolution with North Korea, etc., so forth, and so on. I find little evidence of a global turn in geopolitical stresses currently.

Monday’s ‘buy the dip’ frenzy was no different. The question will be whether the market can both reverse the short-term ‘sell signal’ and climb above the previous resistance of the old highs? Such a reversal would end the current consolidation process and allow for additional capital to be invested.”

That was so last Tuesday…

The reversal, at least to this point, was not to be the case.

Exactly one week after last week’s sell-off, the market dumped again. This time it was the news of the complete dismemberment of President Trump’s “economic council” of CEOs along with the rumor that Gary Cohn would be exiting his position at the White House as well. While the latter turned out to be #FakeNews, the damage had already been done as market participants began to question the ability of the Administration to get its promised legislative action advanced.

Given the run-up in the markets since the election, which was based on tax cuts/reform, infrastructure spending, repatriation and repeal of the Affordable Care Act, the lack of progress on that agenda has left the markets pushing higher on “hope” and “promises.” The disbanding of the economic council has led to some disruption of that confidence.

Importantly, with the market currently on a weekly sell signal, it also compounded the bulls’ problems by breaking the bullish trend line that begins in February of last year.

This is not a “panic and sell everything” signal…yet.

It is, however, a potentially important change to the bullish backdrop of the market in the short-term particularly given the ongoing deterioration in the internal participation in the market. Note that when sell signals have been triggered from similarly high levels (vertical red dashed lines), subsequent corrections have been fairly brutal.

Previously, I questioned whether or not to “buy the dip?”

“My best guess currently is – probably. But not yet.”

I also stated the following two reasons for that sentiment:

1. Bull markets don’t typically end when the mainstream media is “peeing down both legs” over the 1.5% drop on Thursday.

2. The bullish uptrend remains intact and “fear” gauges remain confined to a downtrend.

This remains this week as well. The sell-off so far remains contained above the previous bullish breakout to new highs and remains above current price support levels. Furthermore, while volatility did pick up a bit on Thursday, it has not exceeded last week’s volatility spike, suggesting traders are less worried about a correction than media headlines makes it appear.

Global Markets: Traders Put Record Cash To Work

My Comments: I recall a saying to the effect ‘pride goeth before a fall’. Rampant enthusiasm about investing across the market spectrum probably suggests the same thing. Of course, there’s always a follow up question about how much pride is necessary to trigger a fall. Just know that one is coming and if it concerns you, there are remedies.

Joe Ciolli  /  Jul 23, 2017

In global markets, all signs of sentiment are pointing up. And it’s that very unbridled enthusiasm that could spell their downfall.

But before we get into the negative implications, let’s take stock of everything that shows just how overtly bullish investors are feeling right now.

First, private client cash levels have dropped to a record low as a percentage of total assets, according to data compiled by Bank of America Merrill Lynch. That means investors are feeling more emboldened than ever to put that money to work in the market. They’re choosing that over holding money on the sidelines — a risk-averse move typically associated with uncertainty.

Institutional investors are also holding the lowest levels of cash since the start of the eight-year bull market, survey data compiled by Citigroup show. The measure now sits at less than one-third of a multi-year high reached in 2016.

Second, active equity funds just absorbed their biggest inflows in 2 1/2 years, according to BAML. This is a sign of confidence not just for the market, but for fund managers that make their living picking stocks. It’s a rare bright spot for active management, which has struggled alongside the rise of the red-hot ETF industry.

Third and lastly, in perhaps the most direct reflection of swelling confidence, global markets are hitting records. The S&P 500 and its more tech-heavy counterpart, the Nasdaq 100, hit all-time highs this past week. The gauges are up 265% and 466%, respectively, over the course of the bull market.

Meanwhile, credit indexes have done the same amid 30 straight weeks of investment-grade bond inflows, BAML data show.

What’s resulted is the so-called “Icarus trade,” which has been characterized by the “melt up” seen in risk assets since the start of 2016.

But there’s a downside to flying too close to the proverbial sun — sooner or later, your wings will melt. BAML sees that happening in the second half of the year as the bullish conditions outlined above overheat further.

A “big fall in markets” will be an “autumn, not summer event,” strategists at Bank of America Merrill Lynch wrote in a client note. “Icarus won’t soar forever.”

The comments echo ones made by BAML the week before last, when they cited central bank tightening as a threat to the gradual trek higher in risk assets.

So where do we stand right now? Despite the gloomy late-2017 forecast from BAML, it’s actually a great time to be an equity investor. Company stock prices are moving more than ever on the earnings reports that are trickling out, representing a big potential windfall in the short-term for traders willing to do their homework.

Investment Returns Will Shrink

My Comments: Putting money to work for the future is something we all try to do. Our expectations vary all over the map. If you use the past to predict the future, you’re probably going to be disappointed.

This is very relevant if we have money sitting somewhere that we plan to use tomorrow to support our standard of living.

If we’ve stopped working for a living, our only recurring income comes from Social Security, pensions, and whatever money we’ve saved. All of which makes it imperative we find a way to manage financial risk going forward.

by Dr. Bill Conerly, August 5, 2017

What will an investment portfolio earn over the long term? That issue is important to individual investors, state pension agencies and corporations offering defined benefit pensions. State pension agencies have been lowering their assumed returns. A decade ago, 8.0 percent was the dominant assumption, with some states higher and some lower. Now the most common assumption is between 7.0 and 7.5 percent. The sub-seven assumption was never used as recently as 2011 but is now embraced by several pension authorities.

What assumption should a family, a government agency or a corporate pension fund use? For a long time, it’s been best to go back to the long-term averages, but the current outlook is less rosy. I personally have revised down the estimate I use in planning the Conerly family’s spending and saving, and I concur with public bodies who do the same. I’m not fully convinced that I’m right; I just think the pain from erring on the low side will be less than the pain of erring on the high side.

The traditional approach is to look at long-run returns, and the book of numbers for that analysis is the SBBI Yearbook covering stocks, bonds, bills and inflation (hence the SBBI name). This research is based on pioneering work done by Roger Ibbotson and Rex Sinquefield.

Since 1926, when their dataset begins, U.S. common stocks have rewarded investors by 10 percent per year, counting capital gains and dividends, before taxes. Corporate bond returns averaged 5.6 percent returns. An investment portfolio split 50 percent in stocks (the Standard and Poor’s 500) and 50 percent in corporate bonds would have earned 8.3 percent per year over 1926-2016. That justifies a long-run expected return around 8.0 percent as was common.

But don’t stop reading yet! Remember two important points. First, past returns are not guaranteed in the future. Second, even if the past points the way to the future, the past includes whole decades with negative returns to stocks, albeit just slightly negative.

On the first point, the structure of the economy has changed substantially since 1925 when the good data begin. Jeremy Siegel in his book, Stocks for the Long Run, shows stock market data back to 1802. He finds a seven percent annual return from 1802 through 1925. This suggests that we cannot take investment returns fixed in stone; they can be higher or lower over long periods. (Siegel’s book is one of my top two picks for the average person making investment decisions. The other is Burton Malkiel’s A Random Walk Down Wall Street.)

Stock market returns have been pretty good recently. Look at the S&P 500 since 2012 (counting capital gains and dividends, before taxes):
2012 +16%
2013 +32%
2014 +14%
2015 +1%
2016 +12%

But high returns can be due to overly optimistic speculators rather than economic fundamentals. We know that economic growth has been below normal in recent years. We also know that interest rates have been well below long-run averages. That suggests – but does not prove – that returns on capital are lower now than in the historic average.

Low returns on capital might trigger a stock market gain in the short run, as lower interest expense makes corporate profitability look better. But in the long run, stock market returns must reflect the returns of investing capital in a business. So if low corporate bond interest rates today reflect low returns on capital, then stock market returns should be low in the future.

The story for low returns on capital now is simple: much of our new production requires very little capital. A steel mill or car factory requires lots of capital. A Google or Facebook requires far less. With less need for capital, the owners of capital will earn lower returns. And the global supply of savings is rising, partly due to aging baby boomers around the world and partly because a larger share of world income is in countries with weak social safety nets. I provided more detail in “Returns on Capital – And Interest Rates – Will Be Low In The Future.”

The second caution mentioned above is the tremendous variability of returns. The long-run average for stocks may be ten percent, but the entire decades of the 1930s and the 2010s had negative returns. An investor ended a ten-year period with fewer dollars than at the beginning. And don’t forget the spectacularly bad years: 1931, -43 percent, and 2008, -37 percent.

The long-run average tells you little about next year’s return. If the next bad decade starts just as you retire, you may feel pretty uncomfortable waiting for the long-run average to return. And if you can’t stomach the occasional bad year, then you’re likely to shift into a low-return investment when the stock market rebounds.

If I have to make a best guess as to how the next 100 years will look, I roll with the long-term average and say that stocks will return about ten percent. But I have arranged my personal affairs so that long-run returns can be much lower and I’ll still be able to eat.

Wall Street is sending huge warning signs for stocks

My Comments: Sooner or later, the penny will drop.

Joe Ciolli \ Jul 30, 2017

To a growing chorus of strategists and investors across Wall Street, the stock market looks like it’s headed for a rude awakening.

Their mounting pessimism comes at a time when US equities are looking healthy, at least on the surface. Major indexes are hovering near record highs they reached this past week, while corporate earnings are growing at a blistering pace.

Yet some market experts think this apparent strength is just masking deeper problems brewing under the surface.

Count Marko Kolanovic, JPMorgan’s global head of quantitative and derivatives strategy, as one of those stressing caution. In a client note on Thursday, he said that record-low volatility should “give pause to equity managers.” Kolanovic even went as far as to compare the strategies that are suppressing price swings to the conditions leading up to the 1987 stock market crash.

“The fact that we had many volatility cycles since 1983, and are now at all-time lows in volatility, indicates that we may be very close to the turning point,” he said.

A sudden move down in US stocks on Thursday — including a notably outsized loss in tech — was widely attributed to Kolanovic’s note, highlighting just how seriously many investors have started taking such warnings.

His consternation extends into the hedge fund world, where investment managers are also crying foul about low volatility to anyone that will listen.

Baupost Group, a $30 billion fund, recently highlighted the lack of price swings as a harbinger of pain to come, calling it a possible “accelerant for the next financial crisis.” Meanwhile, Highfields Capital Management, which oversees $13 billion, said this past week that low volatility is giving people the false impression that the market is risk-free.

Going beyond the much-maligned low-volatility environment, Bank of America Merrill Lynch has its own reasons for expecting an upcoming rough patch in stocks — one it sees coming sometime this autumn.

Michael Hartnett, the chief investment strategist of BAML Global Research, points to how the S&P 500 has continued climbing to new highs, even as the size of the Federal Reserve’s balance sheet has stayed relatively unchanged. He says this divergence is a “classic euphoria signal.” Such overexuberance has historically been a sign that investment sentiment is overextended.

Legendary investor Byron Wien, who currently serves as vice chairman of Blackstone’s private wealth solutions group, agrees with BAML. He sees the stock market outpacing the Fed’s balance sheet as problematic and called the development “disturbing” in a July 26 client note.

BAML also points to record low private client cash levels as a sign that the stock market may be close to maxing out. With investors looking fully invested, there’s limited dry powder for them to put to work in the market, should they feel inclined to add to positions.

And, perhaps most importantly to BAML’s call for a market top this autumn, a proprietary indicator maintained by the firm sits on the brink of reaching a sell signal. It’s put together a list of things that need to happen for the market to peak in August:
• The dollar index falls to 90, coinciding with “unambiguous” US labor/consumer weakness (non-farm payrolls lower than 100,000) and a flatter yield curve
• The end of high-yield leadership, which “should be an early warning system”
• Fatigue in equity growth leadership, in areas like the Nasdaq Internet Index, emerging markets Internet, and semiconductors

But, amid the growing pessimism, there are still strategists on Wall Street who see the S&P 500 hanging in there, at least through the end of 2017. A survey of 20 chief equity strategists conducted by Bloomberg shows an average year-end forecast of 2,439, basically unchanged from Friday’s close.

So while it’s anyone’s guess what will transpire in the coming months, it’s good to at least be aware of the cracks forming in the market’s foundation. And don’t say you weren’t warned.